Financial Statement Analysis
I. Introduction
AirXpanders, Inc is well known Australian based organisation in the Healthcare Equipment and Supplies industry. The current CEO of the company is Scott Dodson that has more than 25 years of experience in the medical sector. The home address of the company is Level 13, 41 Exhibition St Melbourne VIC 3000. The company annual represents its financial statement and the last date of ending the financial year was 31 December 2016. The company deals in the healthcare industry due to this, its product and service are relevant from this industry. The main products of the company are Medical technology, Medical devices, Durable medical equipment, Surgical instruments and Pharmacopoeia etc (AirXpanders, 2017). The company deals worldwide and its main geographic areas are Australia and the USA. SingerLewak is an independent auditor of AirXpanders, Inc. The auditor said that the financial statement of the company is good and it involves the correct information. The current share price of AirXpanders is AUD 0.76 (14 Sep 2017). On the same date, there have been no recent dividends for this stock (AirXpanders, 2017).
II. Overview of industry and company plan
The Australian medical equipment industry of Australia is growing good. Australia has a good relationship with the other contraries that provide benefit to this industry. Australia is night largest industry in importing medical equipment from the outside of the country. In this, 80% of the medical equipment are imported from the USA, Japan and UK. In Australia, the income per capita is high so that Australian people are able to purchase a full range of medical equipment. But, at the same time, it is also found that market industry growth has been remaining 1.3% in the last five years since 2012-17 (Zhang, et. al. 2017). It is not good growth as compared to other industries. So it can be said that there is moderate growth in this industry. In Australian medical equipment industry, there are 10123 employees are involved. At the same time, the numbers of the companies are rapidly increasing in this industry that indicates to increase in the competition. In Australia, 80% of medical equipment companies are situated in New South Wales, Victoria and Queensland (Folland, et. al. 2016). Hence, it can be said that the current situation of the industry is not much good but it is moderate. At the same time, there is a good opportunity for companies to get an advantage in this industry because the demand for medical products and healthcare services is expected to grow in the future (Wang, et. al. 2016).
AirXpanders, inc future plan
In the list of the future plan, the company is going to adopt new fiscal policies and standards in accounting standards. This standard will apply on 1 January 2018. At the same time, the company also has a plan to increase the fund amount by equity and debt. AirXpanders has never paid the dividend and there has no plan to pay dividends in future. But, the company is planning to provide the company’s stock among the employees and its consultants.
III. Financial Statement Analysis
Statement of financial performance
| In millions of USD | change % | ||||
| 2014 | 2015 | 2016 | 2015 | 2016 | |
| Gross profit/ loss | -16,12,981 | -39,72,707 | 146% | ||
| Income from operation | -6371480 | -11080403 | -1,91,23,078 | 74% | 73% |
| Net income | -6977751 | -1,11,61,345 | -1,94,22,897 | 60% | 74% |
The above table depicts that the company is regularly facing loss and the amount of the loss is increasing year by year. In 2015, it can be seen that net loss increased by 60% from the last year 2014. Furthermore, in 2016, it increased 74% that is not a good indicator for the future of the company. Hence, the company should take action to increase the revenue and decline expenses to change the loss in profit.
The company follow the US GAAP in preparing the financial statements. The management of the company is responsible to fairly prepare the financial statement of the company (Harris, et. al. 2016). The used policies of the accounting standard are able to consider all the financial information of the year with including the subsidiaries of AirXpanders, Inc. In this, the amount related to the previous year is reclassified to develop transparency in the financial statements (Pingle, 2013). It has no impact on the financial statement or position of the company.
Statement of financial position
| Year | 2014 | 2015 | 2016 |
| assets | 21,37,797 | 2,08,97,503 | 1,55,29,021 |
| liabilities | 4325174 | 38,52,288 | 33,59,852 |
| equity | -2187377 | 1,70,45,215 | 1,21,69,169 |
Compare operating cash flows with the net income
| 2014 | 2015 | 2016 | |
| Operating cash flow | -6791056 | -10834973 | -19154263 |
| Net income | -6977751 | -1,11,61,345 | -1,94,22,897 |
From the above comparison of the net income and operating cash flow, it is found that the company is not performing well. This comparison also shows that the value of the net income is more negative as compared to operating cash flow. But at the same time, the flow of both is equal in the trend analysis. At the same time, it also found that the company is expanding through investing activities. It is because, in 2014, 2015, 2016, the company was spent 95874, 839975 and 1150865 in purchasing property and equipment (Sabre and Ketz, 2014).
Even though, a company raises fund from both financial source such as debt finance and equity finance but the ratio of raising fund from both are different in the context of each company. In the reference of AirXpanders, it is identified that company the main source of finance is equity because the company the value of equity is 12169169 (78.36%) in the total capital. Due to this, it can be said that it is a risky situation for the equity shareholder of the company (Shepherd, 2015). But, at the same time, a low debt-equity ratio indicates stable business finance.
IV. Ratio Analysis
| All figures in ($’ M) | |||||
| Ratio | Formula | 2016 | 2015 | 2014 | Industry |
| Liquidity ratios | |||||
| Current ratio | (Current Assets/Current Liabilities) | 4.17 | 7.22 | 1.18 | 3.18 |
| Current Assets | 14 | 20 | 1.87 | ||
| Current Liabilities | 3.36 | 2.77 | 1.59 | ||
| Receivable turnover ratio | Sales revenues /Avg. account receivable | 4.75 | 3.625 | 5 | |
| Average account receivable | 0.12 | 0.08 | — | ||
| sales revenue | 0.57 | 0.29 | 0 | ||
| Average days’ sales collected | avg. account receivable / sales revenue * 365 | 76.84 | 100.69 | — | 73 |
| Inventory turnover | Cost of sales /Inventory | 3.22 | 3.60 | 2.33 | |
| inventory | 1.41 | 0.53 | 0.17 | ||
| cost of sales | 4.54 | 1.91 | — | ||
| Average days’ inventory on hand | Inventory /cost of sales * 365 | 113.36 | 101.28 | ||
| Long term solvency ratios | |||||
| Debt to equity ratio | Debt / Equity | 10.00% | 15.18% | -162.56% | 49.05% |
| Debt | 1.2 | 2.58 | 3.56 | ||
| Equity | 12 | 17 | -2.19 | ||
| Interest coverage ratio | EBIT / annual interest expense | 31.83 | 27.75 | 32.00 | |
| EBIT | -19.1 | -11.1 | -6.4 | ||
| Annual interest expense | -0.6 | -0.4 | -0.2 | ||
| Profitability ratio | |||||
| Net profit margin | net income / net sales | -3333% | -3793% | -437.89% | |
| Net income | -19 | -11 | -6.98 | ||
| Net sales | 0.57 | 0.29 | 0 | ||
| Total asset turnover | net sales / average total assets | 3.56% | 1.38% | 0.00% | 0.91 |
| net sales | 0.57 | 0.29 | 0 | ||
| average total assets | 16 | 21 | 2.14 | ||
| Return on assets | net income / total assets | -119% | -52% | -326% | 1.14% |
| Net income | -19 | -11 | -6.98 | ||
| Total assets | 16 | 21 | 2.14 | ||
| Return on equity | Net income / average shareholder equity | -158% | -65% | 319% | 11.21% |
| Net income | -19 | -11 | -6.98 | ||
| Shareholder equity | 12 | 17 | -2.19 | ||
| DuPont analysis | Profit margin*total assets turnover * financial leverage | -11.88% | -7.95% | – | |
| Profit margin | -33.33 | -37.93 | |||
| Total assets turnover | 0.04 | 0.01 | – | ||
| Financial leverage | 0.10 | 0.15 | -1.63 | ||
| Cash flow adequacy Ratios | |||||
| Cash flow yield | Free cash flow per share/current market price per share | -6.53 | 16.71 | ||
| Free cash flow per share | -7.64 | 17.46 | -3.57 | ||
| Current MPS | 1.17 | 1.045 | |||
| Cash flows to sales | (Cash from operating activities ÷Net sales) | -33.33 | -37.93 | ||
| Cash from operating activities | -19 | -11 | -6.79 | ||
| Net sales | 0.57 | 0.29 | 0 | ||
| Cash flows to assets | (Cash from operating activities ÷Net assets) | -1.19 | -0.52 | -3.17 | |
| Cash from operating activities | -19 | -11 | -6.79 | ||
| Total assets | 16 | 21 | 2.14 | ||
| Free cash flow | -7.64 | 17.46 | -3.57 | -0.07 | |
| Market strength Ratios | |||||
| price-earnings ratio | MPS/EPS | -4.5 | -3.26563 | 35.79 | |
| MPS | 1.17 | 1.045 | |||
| EPS | -0.26 | -0.32 | -0.17 | ||
| Dividend yield | Annual Dividend / Current Stock Price | 0 | 0 | ||
| MPS | 1.17 | 1.045 | |||
| Annual dividend | 0 | 0 | 0 | ||
Liquidity ratio
It is one of the most significant ratios that are helpful to identify the liquidity position of the firm. It shows the ability of a company to pay its short term liabilities. The above table shows that AirXpanders liquidity position fluctuates. In 2015, the liquidity performance of the company declined but the company improved it again (Graham and Smart, 2011). Along with this, the company is performing well as compared to the industry in the context of liquidity because current ratios are 4.17 and 3.18 of company and industry respectively.
Long term solvency ratio
It is also a key ratio such as liquidity and profitability ratio. It is helpful to measure a firm‘s capacity to meet its liabilities. It shows that whether the cash flow of the company is enough to pay its short term and long term liabilities. In the context of AirXpanders, it is identified that the company is more dependent on equity finance (Harris, 2014). It is because the debt-equity ratio is 10% that declined from 15.18% (2016). It means that there is a risky situation for shareholders.
Profitability ratio
In the financial ratio, the profitability ratio depicts the profitability situation of the company from the operating activities. It also shows the firm ability to generate the earning as compared to expenses or cost. The above ratio table shows that the company is facing loss in the last three years because its profit margin ratios are -3333% and -3793% in 2016 and 2015 in the given order (Herman, 2011). At the same time, it also found that overall industry performance is worst because the industry ratio is -437.89%.
Cash flow adequacy ratio
It ratio is calculated to measure the cash sufficiency in the operation. It depicts that capacity to pay its ongoing expenses (Jochimsen and Thomasius, 2014). In the context of this ratio, it is found that cash flow from yield is -653 and 16.71 in 2016 and 2015. Moreover, cash flow to sales is -33.33 and -3793 in 2016 and 2015. At the same time, cash flow from assets and free cash flow are -1.19 and -764 for the financial year 2016. All the findings show the cash flow adequacy is declining of AirXpanders.
Market strength ratio
This ratio is important for investors because its shows the company strengths for paying a dividend to its shareholders (Sridhar, et. al. 2015). In this, the price-earnings ratios of AirXpanders are -4.5 and -3.26 for the financial years 2016 and 2015. At the same time, the industry ratio is 35.79 that means the company is back from the industry. The dividend yield ratio is null because the company has never paid dividends.
V. Conclusion
From the above discussion, it is found AirXpanders is unable to generate profit from in the healthcare equipment industry. Along with this, it is found that the overall performance of the industry is not good due to AirXpanders is not getting profit. Hence, it is recommended to AirXpanders that it should minimise its expenses to earn profit. Additionally, it should also concern to increase debt to equity ratio. On the basis of the overall analysis, it can be said that AirXpanders is not a strong performer. It has never paid dividends and not future plans so that investment decisions will not be good in this.
References
AirXpanders (2017) Annual report [Online] Available at: http://www.asx.com.au/asxpdf/20160330/pdf/4364tdsf0w4xfp.pdf (Accessed: 14 September 2017)
AirXpanders (2017) Annual report [Online] Available at: https://www.google.co.in/search?q=auditor+report++of+AirXpanders%2C&oq=auditor+report++of+AirXpanders%2C&gs_l=psy-ab.3…9108.9649.0.10210.3.3.0.0.0.0.163.478.0j3.3.0….0…1.1.64.psy-ab..0.0.0.frxg8TW-vrE (Accessed: 14 September 2017)
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